Eggs and baskets.
I have just realized that I subjected my poor, beleaguered flist to an Investment Philosophy Inquisition, but never got around to explaining why or giving the answers to the more fact-based questions. To break it down, I was interested in the tendency to shift between higher risk investments (like stocks) and lower risk investments (like timed deposits) depending upon the strength of the economy. Many people have misconceptions about retirement-planning.
Money Preserving
Investments that preserve money (like timed deposits) are very secure. The government even guarantees the first $100,000, so you should be okay even if your bank fails. Unfortunately, these accounts are also low-yield. Even the ones that offer interest don't do much more than keep pace with inflation. The ones that don't offer interest (like checking accounts) will result in depreciation. Even in a country like the US, where inflation is a pretty steady 3.1%, inflation can ravage a retirement account. The average retirement is currently around 30 years. In that time, compounded inflation will result in prices tripling. Many people do not realize this when they calculate the amount of savings they will need.
Money Generating
Riskier investments (such as stocks) offer much greater yield. Unfortunately, it is also possible to lose all your money on a bad stock. This highlights the importance of a diversified, reliable stock portfolio. Cautious stock investment is actually a great deal more secure than most people realize. Though "boom and bust" is endemic to the stock market, in the long run the stock market is always growing in value. The key words being "long run". Short term stock investments are phenomenally risky, and I wouldn't recommend them to anyone who is not an obsessively-researching genius with a lot of time and a wad of luck in their pocket. You should always have enough money in secure, liquid assets that you can last a few years without having to sell stocks. In the long run, you are virtually guaranteed positive returns for good stocks. Over a five year period, 93% of S&P stocks yielded positive returns. Over a 15 year period, 100% of S&P stocks gave positive returns. Dividends are generally higher than 10%, and frequently much higher. I don't know a great deal about real estate, but I imagine that it would function similarly--it almost always goes up in the long term, but in the short term it can be risky.
Compromises
Mutual funds are one of the greatest investment innovations ever invented. Basically, you buy in to a huge pot of stocks, bonds, CDs, etc., and get your portion of the income. Because it's a huge, diverse, shared pot, the risk does not present a great danger to individuals. There is also considerable leeway in allowing the investor to choose riskier/more secure pots. Many retirement plans are actually mutual funds.
Money Preserving
Investments that preserve money (like timed deposits) are very secure. The government even guarantees the first $100,000, so you should be okay even if your bank fails. Unfortunately, these accounts are also low-yield. Even the ones that offer interest don't do much more than keep pace with inflation. The ones that don't offer interest (like checking accounts) will result in depreciation. Even in a country like the US, where inflation is a pretty steady 3.1%, inflation can ravage a retirement account. The average retirement is currently around 30 years. In that time, compounded inflation will result in prices tripling. Many people do not realize this when they calculate the amount of savings they will need.
Money Generating
Riskier investments (such as stocks) offer much greater yield. Unfortunately, it is also possible to lose all your money on a bad stock. This highlights the importance of a diversified, reliable stock portfolio. Cautious stock investment is actually a great deal more secure than most people realize. Though "boom and bust" is endemic to the stock market, in the long run the stock market is always growing in value. The key words being "long run". Short term stock investments are phenomenally risky, and I wouldn't recommend them to anyone who is not an obsessively-researching genius with a lot of time and a wad of luck in their pocket. You should always have enough money in secure, liquid assets that you can last a few years without having to sell stocks. In the long run, you are virtually guaranteed positive returns for good stocks. Over a five year period, 93% of S&P stocks yielded positive returns. Over a 15 year period, 100% of S&P stocks gave positive returns. Dividends are generally higher than 10%, and frequently much higher. I don't know a great deal about real estate, but I imagine that it would function similarly--it almost always goes up in the long term, but in the short term it can be risky.
Compromises
Mutual funds are one of the greatest investment innovations ever invented. Basically, you buy in to a huge pot of stocks, bonds, CDs, etc., and get your portion of the income. Because it's a huge, diverse, shared pot, the risk does not present a great danger to individuals. There is also considerable leeway in allowing the investor to choose riskier/more secure pots. Many retirement plans are actually mutual funds.